Question

Pisa Company acquired 75% of Siena Company on January 1, 2003 at book value. During 2003, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 2003 and later sold it in 2004. In 2004, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 2004. In 2004, Pisa reported stand-alone income of $550,000 and Siena reported total net income of $118,000.

a. Prepare the consolidation entries that related to intercompany sale of inventory for 2003.

b. Prepare the consolidation entries that related to intercompany sale of inventory for 2004.

c. Calculate consolidated net income AND income assigned to controlling shareholders in 2004.

Answer 1

All amounts are in $

Ans a. Entries of 2003

Intercompany Account Receivable Dr 50000

To Intercompany Sales Cr 50000

Intercompany Cost of Sales Dr 35000

To Inventory Cr 35000

Ans b. Entries for 2004 are

Intercompany Account Receivable Dr 60000

To Intercompany Sales Cr 60000

Intercompany Cost of Sales Dr 40000

To Inventory Cr 40000

Ans c. Net Consolidated Income of 2004 is

Pisa income = 550,000

Less: Intercompany profit = 5000

Net income of Pisa = 545,000

Siena Income in 2004 = 118,000

Total Consolidated income = 663,000

Income assigned to controlling shareholders is 75% of 118,000 = 88,500